Court Extends Rule on Sales Of Securities

The Supreme Court yesterday made it easier to use federal anti-fraud laws to police privately negotiated stock sales.

By an 8-to-1 vote, the court said anti-fraud provisions of federal securities laws may apply when ownership or control of a closely held business is transferred by the sale of stock.

The decision -- reached in separate cases, one involving the sale of 100 percent of a lumber company in Washington state and the other involving transfer of 50 percent of the stock in a beer, wine and liquor distribution business in New Jersey -- appeared to resolve a hot debate in federal appeals courts.

About half the appeals courts had ruled that federal securities laws do not apply when a private business is sold as a stock sale. Those courts invoked a "sale of business doctrine" that shielded such transactions from federal law. Under the doctrine, disputes arising from such stock sales had to be settled under state laws.

Writing for the Supreme Court, Justice Lewis F. Powell said even closely held stock represents a "security" under federal securities laws, and "the sale of business doctrine does not apply" when all such stock or enough to represent a controlling interest in a business is sold.

Powell explained that, in some cases, control comes with the acquisition of more than 50 percent of the stock, but in others control could be gained with less than 50 percent.

In the two cases decided yesterday, two federal appeals courts had reached conflicting decisions.

In the lumber company case, the high court voted 8 to 1, with Justice John Paul Stevens dissenting, to reverse the 9th U.S. Circuit Court of Appeals. The lower court had ruled that the purchase of 100 percent of the Landreth Timber Co. in a privately negotiated stock sale fell within the "sale of business" exception.

In the liquor case, the court voted 8 to 1, with Stevens again dissenting, to affirm a decision by the 3rd U.S. Circuit Court of Appeals. The appeals court ruled that even though 50 percent of the stock in Continental Import and Export Inc. had changed hands, the "sale of business" exception did not apply.